Market model - methods of computing cost of capital, Finance Basics

Market Model - Methods of Computing Cost of Capital

This model is utilized to establish the percentage cost of ordinary share capital cost of equity (Ke). If an investor is holding ordinary shares, so he can obtains returns in two (2) forms:

Dividends

Capital gains

Capital gain is assumed to constitute the difference between the buying price of a share at the beginning of the (P0), the selling price of the same share at the end of the period (P1). Therefore total returns = DPS + Capital gains = DPS + P1 - P0.

The amount invested to derive the returns is equal to the buying price at the beginning of the period (P0) therefore percentage return/yield =